Archive for November 2017

1. The Fed should focus on monetary policy and not get into credit allocation. They should focus on buying Treasuries, not other types of debt (unless they run out of Treasuries to purchase–which is not likely.)

2. The Fed should rely on policy rules, not discretion.

3. The Fed should do whatever it takes to hit its policy goals, including unlimited asset purchases and negative IOR, if necessary.

Mr Goodfriend was critical of aspects of the Fed’s quantitative easing policies, saying it should be wary of purchasing mortgage-backed securities, and has embraced the use of monetary policy rules to guide a central bank’s thinking.

But the economist, who is known as a free thinker, has not ruled out radical stimulus options. In 1999 he wrote that negative rates were a feasible option, years before central banks started experimenting with them. In 2015 he presented a paper on the subject of negative rates at the Fed’s Jackson Hole symposium in Wyoming.

The Financial Times has several interesting pieces on recent trends in China:

Chetan Ahya, an economist at Morgan Stanley, said that alongside the decline in the Gini coefficient, China has also improved another measure of inequality, the rural to urban income ratio, from a low of 29.4 per cent in 2004 to 37 per cent by 2016.

The rapid rise in rural incomes means Morgan Stanley now predicts that China will reach the World Bank’s high-income threshold of $13,700 a head by 2025, two years earlier than its previous forecast.

Alongside rising wages, Mr Ahya said equality was also being aided by gradual, if slow, reform of China’s hukou system, which has restricted access to public healthcare, education and housing for the many millions of migrant workers who have flocked to China’s major cities.

The existence of this system meant that, “on an underlying basis, income inequality was actually higher” than the Gini measure suggested, Mr Ahya argued. However, with cities with populations below 500,000 now fully open to migrants, those with populations up to 5m having to accept urban residency applications after five years of social security payments, and Beijing having set a target of giving urban residency status to 100m migrants by 2020, this impediment is starting to be removed.

There is also progress on the environment, something I noticed the last time I went to Beijing:

A lower Gini coefficient also helps de-risk investment in China, Mr Bakkum argued. “The current leadership understand that social inequality and environmental problems can lead to social unrest.”

As an example, he cites the notoriously bad air pollution problems in Beijing, which now finally seem to be being addressed. “They have focused a lot on the environment in Beijing in particular and you can see the difference. The risk of big social unrest because of the environment has come down.”

Another FT article suggests that the Chinese are beginning to heed my “more money, less credit” suggestion:

China’s central bank injected $47bn into its financial system, its largest intervention in nearly a year, in an effort to calm investor fears that Beijing’s crackdown on debt-fuelled growth would put a brake on the country’s rapid expansion.

Please don’t take any of this as an endorsement of the recent political trends in China, which has followed the sort of anti-intellectual nationalism that we see in Russia, Turkey, Poland, Hungary, Philippines, India, and yes, another former leader of the “free world”.

Speaking of China, this is a smart move by the GOP–at least in political terms:

The U.S. Justice Department has threatened to sue Harvard University to force it to turn over documents as it investigates whether the Ivy League school’s admission policies violate civil rights laws.

Citing a 2015 lawsuit that charges the school’s affirmative action policies discriminate against Asian-American applicants, the federal government in a letter set a Dec. 1 deadline for Harvard to hand over documents on its admission policies.

I don’t have an opinion either way on whether this is good public policy, but the Dems are foolishly throwing away votes in the Chinese community by ignoring this issue. It may not have shown up in the polling yet, but there is a strong move toward the GOP among educated Chinese-Americans, and it’s driven almost exclusively by perceived anti-Asian racism at elite universities. This should be a strong Democratic issue, as the GOP generally doesn’t believe in these sorts of anti-discrimination lawsuits. The fact that it’s the GOP doing this and not the Dems is . . .

Sad!

PS. The article points out that Brazil has made more progress against “inequality” than China, as seen by the more rapid decline in its Gini coefficient. So in which country are the poor doing better? (Hint, compare recent GDP growth rates.)

“With care—we’ve gotta be careful—and professionalism, we plan to develop policies to increase forfeitures,” Sessions told a crowd of law-enforcement officials in Minneapolis in July, previewing a federal directive to undo the Obama Administration’s mild constraints on the practice. In theory, civil forfeiture allows law enforcement to seize cash, cars, and other goods with provable ties to crime. But it has also deprived thousands of citizens of their property without due process. Unlike criminal forfeiture, civil forfeiture doesn’t require a property owner’s conviction, and the burden of proof falls largely on the person whose goods have been seized.

“[With the update], we are going to much greater scrutiny of these cases, and thus delays, even when the underlying facts have not changed,” Lawrence told CNNMoney.

Immigration attorney Chris Wright of The Wright Law Firm told CNNMoney that it fits a broader pattern: “It seems clear that USCIS have been instructed to push back wherever they can…” he said, noting that “the prevailing attitude seems to be, ‘How might we be able to deny this petition?'”

Attorney General Jeff Sessions took new steps Thursday to punish cities he believes are not cooperating with federal immigration agents in a move that was met with bewilderment by local officials who said they did not know why they were being singled out.

Tears streamed down Claudia Jendron’s face this year as her doctor patted her hand and told her, after eight years of failed pain treatments for her spinal fusion-gone-wrong, “This is going to work, Claudia.” She was talking about medical marijuana.

For “eight years of hell,” Jendron tried opioids, epidural shots and acupuncture in the hopes that she’d be able to sit down or go to her grandchildren’s birthday parties without having to leave and lie down. None of it worked. At one point, she considered checking into an assisted living facility to receive morphine before she tried medical marijuana.

Then, early this year, the 66-year-old upstate New Yorker got a prescription for medical marijuana to help what she called “excruciating pain.” To Jendron’s surprise, her doctor was right about the weed. Two days after starting a tincture (a liquid cannabis extract dropped under the tongue), her crushing pain subsided to something manageable. . . .

The text of the Rohrabacher-Farr (also known as Rohrabacher-Blumenauer) Act, which blocked the U.S. Department of Justice from spending any money to prosecute medical marijuana in states where it’s legal. H.R. 2029 – Consolidated Appropriations Act, 2016

In May, Attorney General Jeff Sessionspushed back against the bill when he sent a strongly worded letter to Democratic and Republican leaders in Congress, asking them to oppose protections for legal weed and allow him to prosecute medical marijuana.

“I believe it would be unwise for Congress to restrict the discretion of the Department to fund particular prosecutions, particularly in the midst of an historic drug epidemic and potentially long-term uptick in violent crime,” Sessions wrote in his letter.

Sessions is known for being one of the nation’s toughest critics of legal pot. He once said the KKK was “OK until I found out they smoked pot.”

There is some deregulation occurring in areas like education and health care. But I worry that there is too much focus on lowering regulations on business, and not enough on making markets freer. For instance, in finance you can reduce regulations by reducing moral hazard, or you can reduce regulations by leaving the distorted regulations in place (FDIC, FHA, the GSEs, TBTF, etc.) and then free up banks to abuse the moral hazard created by that system even more than they currently do. You can probably tell which type of “deregulation” I support.

When they start abolishing the Ex-Im Bank, Fannie and Freddie, Federal flood insurance, etc., then I’ll take the deregulation claim more seriously. Right now I’m not impressed. I worry that the Trump administration wants to make it easier for doctors and real estate developers and weapons makers and lots of other special interest groups to rip off the American public. I worry that they want to increase regulations on legal immigrants struggling to stay in the country, or average people in pain who need medical marijuana, or small businesses who have their life savings seized by corrupt local cops.

Let’s try paring back regulations that cause distress for people on the bottom of society. The upper class is already doing fine.

It was supposed to be easy. When the Federal Reserve started hiking the federal funds rate, longer-term interest rates would rise. After all, they were at very low levels, restrained by a low-term premium. The “Greenspan conundrum” of the past two cycles, when long rates failed to respond in line with higher short rates, couldn’t happen a third time in such circumstances. But it didn’t work out that way. Short rates continue to gain on firming expectations of tighter Fed policy while long-rates stubbornly track sideways.

How many times does this have to happen before people stop assuming that higher interest rates represent tighter money? In fact (as Duy suggests) a tighter monetary policy will often put downward pressure on longer term rates (relative to short rates):

We shouldn’t be surprised by the flattening yield curve. That is what typically happens during tightening cycles and there was no reason to think it would not be the case this time.

Longer term bond yields tend to track expected long-term NGDP growth, although of course other factors also play a role. But expected NGDP growth is by far the most important factor, and largely explains why long-term rates are much lower than during 1972-81, when NGDP was growing at double digit rates. And tighter money tends to slow expected NGDP growth.

The yield curve is one of the better predictors of the business cycle, but it’s not perfect. The current yield curve is flatter than usual, but not flat enough to predict a recession. (Research suggests that it would need to be substantially inverted to signal a recession is more than 50-50.) Given that stocks are doing quite well, I’d say that the consensus view of the financial markets is that a recession is unlikely during the next few years, but not impossible.

Duy also points to the continued undershoot of inflation:

Arguably, though, the Fed only reinforces expectations that 2 percent is a ceiling with its commitment to rate hikes even as inflation remains below that level. In fact, monetary policy makers appear dead set to continue rate hikes next month, and into 2018. The message sent is that they stand ready to snuff out any expansion that threatens to push inflation above 2 percent.

It’s difficult to evaluate Fed policy in isolation; one needs to consider the regime over an entire business cycle. Thus the current sub-2% inflation rate is entirely consistent with the dual mandate, assuming that inflation is appropriately countercyclical (which is what the mandate implies.) But in the past inflation has tended to be procyclical (in violation of the dual mandate), in which case current policy is inappropriately tight.

So how do we know if the Fed policy today is appropriate? We don’t know, and won’t know until the next recession. If inflation rises during the next recession, then current policy will have been appropriate—even though inflation is now under 2%. If inflation falls during the next recession then current policy will have been inappropriately tight. Based on past experience, the latter assumption is more plausible, but again, current policy is exactly right if the Fed were taking its dual mandate seriously. That mandate calls for slightly above 2% inflation during periods of high unemployment, and slightly below 2% inflation during periods of low unemployment. And right now unemployment is well below average. The dual mandate calls for sub-2% inflation at this point in time.

People used to say that a conservative is a liberal who’s been mugged. I wonder if the same sort of principle applies to progressives who have been elected governor, and assume responsibility for the health of their state’s economy:

New York will be destroyed if the deductibility of state and local taxes is included in any final plan that passes the House.

His next door neighbor Connecticut is a perfect example of a state economy wrecked by “progressive” high tax policies.

PS. In a previous post I wrongly claimed that 53 Alabama pastors had signed a letter in support of Roy Moore after the recent scandal. That was not accurate; the letter was written several months ago. But this Boston Globe story suggests that not much has changed:

Over the last week, the Globe called dozens of evangelical pastors in Alabama and elsewhere who had supported Moore before the allegations emerged, gleaning from a list of names posted to the Facebook account of the candidate’s wife.

None of the nearly 10 pastors reached by phone said the allegations of sexual misconduct changed their views about Moore. Several said the allegations made them more proud to vote for the former judge.

Repeatedly, the pastors attempted to discredit Moore’s accusers in personal terms, with some dismissing their emotional stories as “crocodile tears” and “fake news.”

“I don’t know how much these women are getting paid, but I can only believe they’re getting a healthy sum,” said pastor Earl Wise, a Moore supporter from Millbrook, Ala.

Wise said he would support Moore even if the allegations were true and the candidate was proved to have sexually molested teenage girls and women.

“There ought to be a statute of limitations on this stuff,” Wise said. “How these gals came up with this, I don’t know. They must have had some sweet dreams somewhere down the line.

“Plus,” he added, “there are some 14-year-olds, who, the way they look, could pass for 20.” . . . “You’re asking me to believe them,’’ Raddish said, “when their own mother didn’t have enough red blood in her to . . . go and report this? Come on.”

And here’s how Jim Geraghty of the National Review responded to the pastors:

Yeah, why didn’t those mothers go down to the local district attorney and report that their daughters were being inappropriately sexually pursued by . . . the local assistant district attorney?

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Welcome to a new blog on the endlessly perplexing problem of monetary policy. You’ll quickly notice that I am not a natural blogger, yet I feel compelled by recent events to give it a shot. Read more...

Bio

My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.